European banks lean on hedge funds as recap gathers momentum

Reuters – European banks have turned to hedge funds to help them raise deeply subordinated hybrid capital in 2013, but the high risk nature of the asset class and potentially higher rates could pose problems further down the line.

Hedge funds used to suffer cuts in allocations on subordinated debt deals in favour of real money accounts. But throughout 2013, European banks have been reliant on these investors that, in some cases, have bought almost half of new issues. Banks have raised almost US$40bn equivalent in euros and dollars so far this year according to Thomson Reuters.

“The bank subordinated debt market has been very hedge fund heavy for some time. The volatility created by the crisis chased away a lot of the traditional long-only investors,” said Nick Linnane, senior portfolio manager at hedge fund firm Cube Capital, which runs $1.3bn in assets.

“This is exactly what hedge funds do. We do our homework and go into an area where other people are yet to go.”